After the major meltdown of the banks in Europe, the industry that has come under scrutiny almost as much as financial institutions is the audit industry. Had the auditor’s done their job well, the meltdown could have been avoided. This actually can be said of almost all scandals and meltdowns. The auditors are the final check for all financial numbers the public companies report to external parties. In some cases the auditors raise red flags (see article “You’ve been warned!“) but the company’s officers ignore the concerns and eventually there is a big blow up. But recently there have been more cases where the auditors have missed big issues in the financials or internal controls of the companies, the effect being big meltdowns.

But is having more audit firms the answer to the problem. Britain’s Competition Commission believes so. They believe that the Big 4 are restricting competition in Britain’s audit market for the top 350 listed companies. And due to the Big 4 dominance, the Commission believes public companies are suffering. The Financial Reporting Council has asked that the audit work should be put out to tender at least every 10 years.

But is the answer increasing competition in the audit industry or is the answer having more accountability associated with the audit firms.

On August 26,2010; a New Jersey appeals court found sufficient evidence that KPMG was negligent in its audits of the books of Papel Giftware Inc. KPMG audited the books of the ceramic company, the acquirer, Cast Art Industries LLC., and its financial backers relied on these audit reports to buy the company. Had KPMG done a better job, the audit should have uncovered vast fraud and irregularities, and definitely would have made the aquirer think twice about making the purchase.

In preparation for its 2000 merger with Cast Art Industries LLC, Papel Giftware Inc. retained KPMG to audit its books for 1997 through 1999.After the merger, Cast Art’s officials discovered that Papel had overstated its revenues and sales. Two years after Cast Art bought Papel, it went under, largely because of the debt it incurred in purchasing the company that was worth little or nothing.

The question is whats the purpose of getting books audited if you cant rely on it to make business decisions. The company went under because they relied on KPMG’s audit report. Auditing the company’s financials, isn’t that what KPMG was supposed to do?

News

On November 10,1494, the first book about double entry systems was published by the Italian mathematician, Lua Pacioli, also known as the father of accounting. In his honor the day is celebrated as the International Accountants Day! To all fellow accountants, keep up the great work.

Italy's Antitrust authority fined the big 4 (Ernst & Young, Deloitte, KPMG and PWC) a total of 23 million euros for allegedly conspiring and colluding to divvy up large public consultancy contracts. Looks like the Big 4 need to revise their Ethics class!

Two more corporate shareholders filed a legal claim against Toshiba, linked to the the 2015 accounting scandal, seeking $5.08 million in compensation for damages. This brings the total damages sought to $1.2 billion!